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Biotech ETFs to watch as companies push for coronavirus treatments

Yahoo Finance's Seana Smith and ETF Trends CIO and Director Dave Nadig discuss the outlook on biotech ETFs as optimism grows over results for coronavirus treatments.

Video Transcript

SEANA SMITH: It's time for our ETF report brought to you by Invesco. So as pharma and biotech companies rush to find a vaccine and a treatment for coronavirus, health care ETFs have been drawing investors' attention with more money flowing into those funds.

So for more on this, I want to bring in Dave Nadig, Director of Research for ETF Trends. And day-- Dave, thanks so much for joining the show again. Let's start with that news about Moderna today. It has investors very excited. You can see it in the share price action of Moderna today, as well as a lot of its competitors. My question to you is, should investors be looking to buy biotech ETFs at this point?

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DAVE NADIG: Well, I definitely think that if you're looking to sort of profit from the response to the coronavirus, a health care ETF is not a bad way to go. I think the challenge is picking the right spot. I think a lot of folks look to things like the SPDR tracking the space, the Health Care Select Sector SPDR XLV. You know, it's $26 billion. It trades like water.

That tends to be what people grab first. The problem is, while it does have some of these names that we've been hearing in the headlines, like an Amgen or an Abbott Labs, it's so diversified into other things like insurance and equipment that it hasn't really participated in any of the rallies we've seen to the extent that a more narrow approach is. It's up-- it's basically flat for the year, which is certainly better than the S&P 500, but doesn't really get you that core biotech exposure.

SEANA SMITH: So Dave, if you're looking to get that core biotech exposure, I guess, how do you pick the right funds? What should you be looking for when you're trying to identify the right ETFs to invest in?

DAVE NADIG: Well, you know, I think if you're looking at this as a headline play, which, you know, this is speculation, we should acknowledge this, so you're not putting your retirement plan in this, I think the right thing to do is to look for those 23 companies that are really focused on vaccine development and therapeutics specifically for COVID. It's fairly easy to find that list of trials that are out there. I ran those numbers this morning, and the top pick there would be something like BBH, the VanEck Vectors Biotech ETF. It has 35% of its exposure in firms that are directly involved in this COVID response. It's up about 16 and 1/2%, 17% so far this year, definitely rallying today.

That gives you a little bit more exposure than something that may be a little better known like, say, the iShares Nasdaq Biotech ETF ticker IBB. You're certainly getting some exposure there. About 27% of its holdings are currently engaged in some sort of COVID response.

But BBH from VanEck, I really like. It also gives you some global exposure. We get really focused on these US listed names, particularly some of the smaller ones, but there are still a few international companies out there that really do give you exposure. That's part of why it gets the highest tick mark on COVID response plays.

SEANA SMITH: And Dave, one of your other picks that stood out to me was the ARK Investments Genomic Revolution ETF. And it's a little bit different. It's up around almost 40%, I think, since the start of this year. Why could this be a smart play for some investors out there?

DAVE NADIG: Yeah, so if you're worried that a lot of this may be priced in, right, I mean, we've got all these companies who are out there chasing vaccines, a lot of them have had several hundred percent rallies already this year, which is what's driving the performance of these funds, something like ARKG from-- from ARK Invest might be a better play. It doesn't have huge exposure to those names that we may be hearing about. Instead, it's investing perhaps a layer down into the real innovations that are driving some of these discoveries.

It's run by Cathie Wood who's become a little bit of a household name stock picker, something we really haven't seen in about 20 years. But she's just been on fire, and she's making picks in all sorts of genomics plays, not just in pharmaceutical development, but in the core underlying technologies. And honestly, she's just been on fire for about a year and a half now. That's why you're seeing that up 39%, even though it really only holds one or two of those core vaccine plays right now.

SEANA SMITH: And Dave, real quick. Just overall, just for ETF fund flows, where are we seeing the most money allocated? Because we know in the beginning of this crisis, many investors were standing on the sidelines trying to just wait and see how this all shakes out. So what has the behavior been over the last week or two?

DAVE NADIG: It's definitely a case of investors trying to figure out who the winners and losers are going to be. And surprisingly, it's not necessarily the obvious losers that aren't getting the flows. It's actually the opposite. So we've seen huge flows into things like the airlines ETF, JETS, and into energy stocks.

I think that's mostly individual investors really trying to catch the falling knife here, trying to call these oversold, perhaps now value plays, in industries that aren't going to go away, but are just experiencing some trouble. I think that's a core way of thinking about the market-- who are the long-term winners, and who are the short-term winners? And that's really where we're starting to see that divergence in flows.

SEANA SMITH: All right, Dave Nadig, Director of Research for ETF Trends. Thanks so much for joining.